Deciding how to tackle debt while still wanting to invest simultaneously? It’s the kind of dilemma that most of that investors face, whether to clear off the pending debt with excessive cash available or to invest the same money with an intention of creating greater amount of wealth. At the same time, if you’re too aggressive with your approach, you might end up losing everything. In order to make a decision between the two options, one must consider several factors like your best investment options, cash available, and risk appetite.
As a matter of fact, paying off your debt itself is an investment, in fact everything that you do with your money is. What matters is what the returns would be on the choices of investment you make. However, debt-reduction could be one of the wisest decisions you could ever make. Every bit of debt that you clear will be a step towards saving and investing in assets that can appreciate in near future and earn interest in exchange.
Expected returns
The first question one must ask themselves is, how much returns will you gain in exchange of investing or paying off debt? Even debts have some returns, getting rid of a loan is worth as much, in your personal budget, and it’s just like an investment on monthly basis. By investing the additional cash, you pass an opportunity of reducing your debt, and you are looking to invest the same at a higher return than what it would otherwise cost you.
When it comes to making a decision between paying off your debt or investing, the kind of debt you possess also plays an important role. On one hand, if you have the choices of investing by paying down your credit card debt at 19 percent interest or on the other hand the choice of investing in a mutual fund with a 10% annualised returns, it would make sense to rather invest in your credit card debt.
Contrary to this, there’s also a fear of not having any investments as you get closer to your retirement. Living a debt-free life with absolutely no investment won’t give you an opportunity to stop working either. In order to balance this scenario, it is always advised to start investing and saving right from your young age, because starting to do so at your old age will require heavy efforts.
Financial theories clearly suggest that if your after-tax return on investments is higher than your after-tax cost of debt, then you should go ahead with the investment. As a priority, clearing off your high-interest debt should be your primary task today in order to free up your future to create more wealth and a strong portfolio over a period of time.
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